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Tag: romneycare

The Massachusetts health care law that Gov. Mitt Romney signed in 2006, and the nearly identical federal law that President Obama signed this year, create perverse incentives that are causing health insurance costs to rise and could eventually cause health insurance markets to collapse. A report released yesterday by the Massachusetts Division of Insurance shows that process is well underway.

Massachusetts requires health insurance companies to sell to all applicants, and imposes price controls that require insurers to charge all applicants the same premium, regardless of their health status. ObamaCare would do the same.

Those price controls have two principal effects on healthy people. First, they increase the premiums that insurers charge healthy people (the additional premium goes to reduce premiums for sick people). Second, they enable healthy people to wait until they are sick to purchase coverage. Since insurers must take all applicants, and charge them the same premium, there is little or no downside to waiting until one gets sick to purchase coverage.

Those price controls also guarantee that when healthy people drop out of insurance pools, premiums rise for everyone who remains, which causes more healthy people to drop out, and do on. Economists and actuaries call this an “adverse selection death spiral.”

The Boston Globereports that the Massachusetts Division of Insurance found that in the wake of RomneyCare, many more healthy residents are purchasing coverage only when they need it:

The number of people who appear to be gaming the state’s health insurance system by purchasing coverage only when they are sick quadrupled from 2006 to 2008, according to a long-awaited report released yesterday from the Massachusetts Division of Insurance.

The result is that insured residents of Massachusetts wind up paying more for health care…

The number of people engaging in this phenomenon — dumping their coverage within six months — jumped from 3,508 in 2006, when the law was passed, to 17,177 in 2008, the most recent year for which data are available.

In the hope of preventing this sort of gaming behavior, RomneyCare requires Massachusetts residents to purchase health insurance. Yet that “individual mandate” appears not to be working, probably because the penalties for non-compliance are far less than the cost of the mandatory coverage. Thus many residents decline to purchase health insurance, pay the penalty (or misrepresent their coverage status), and purchase health insurance only when they need medical care.

ObamaCare contains similar price controls and requires nearly all Americans to purchase health insurance by 2014. Yet ObamaCare’s penalties for non-compliance are also far less than the cost of the required coverage for most people.

By making sure insurance covers people who are most at risk, there will be less uncompensated care and the amount of cost shifting among those who have coverage today will be reduced by up to $1 billion in 2013.

According to research by the Urban Institute, that “hidden tax” isn’t very large:

Private insurance premiums are at most 1.7 percent higher because of the shifting of the costs of the uninsured to private insurers in the form of higher charges.

As the Congressional Budget Office repeatedly lectures Congress, “Uncompensated care is less significant than many people assume.”

Likewise, these mandates’ effect on uncompensated care will be less significant than the Obama administration would like you to think. Using data from the Centers for Medicare & Medicaid Services and a reasonable assumption of 6-percent annual growth, total private health insurance premiums in 2013 will be in the neighborhood of $1.1 trillion. So the administration is boasting that these mandates will reduce the 1.7-percent “hidden tax” imposed by uncompensated care to 1.61 percent.

Indeed, the whole of ObamaCare may not do much to reduce the “hidden tax” of uncompensated care. After Massachusetts enacted a nearly identical law, the Urban Institute reports, “high levels of emergency department (ED) use have persisted in Massachusetts. Specifically, ED use was high in Massachusetts prior to health reform and has stayed high under health reform.” A lot of uncompensated care comes in through the ED.

Finally, notice how a 1.7-percentage-point premium surcharge is a bad thing if President Obama is ostensibly rescuing you from it, but a good thing if he’s imposing it on you.

Supporters of those laws, like MIT health economist Jonathan Gruber, point to data showing that premiums for individually purchased health insurance policies in Massachusetts fell after 2006. Yet that was expected, and is not evidence that RomneyCare reduced health insurance costs. RomneyCare merged Massachusetts’ “individual” health insurance market with the market for small employers. The individual market accounts for just 4 percent of the private market, and premiums in that market were higher than for employment-based coverage. When the two markets merged, the price controls that Massachusetts imposes on health insurance led to an averaging of premiums: premiums for individual purchasers fell, and premiums for small-business employees increased to pick up the slack. That is, RomneyCare shifted costs from people who purchase their own coverage to workers who obtain coverage on the job.

Economists John Cogan, Glenn Hubbard, and Daniel Kessler compared premiums for job-based coverage in Massachusetts, before and after RomneyCare, to job-based premiums nationwide. They found evidence that RomneyCare increased employer-sponsored insurance premiums, particularly at small firms:

We find that health reform in Massachusetts increased single-coverage employer-sponsored insurance premiums by about 6 percent in aggregate, and by about 7 percent for firms with fewer than 50 employees. The effect of reform on family premiums is less uniform. If Massachusetts is compared to the nation as a whole, reform had a modest 1.5 percent effect on family premiums. However, in the Boston MSA, and among employees of small firms, the effect of reform on family premiums was much greater. Family premiums grew by about 8 percent more in Boston than in the 19 largest other MSAs from 2006-08, as compared to 2004-06. For small employers, the differential Massachusetts/US growth in small-group premiums from 2006-08, over and above the growth from 2004-06, was 14.4 percent.

Their study is subject to important limitations. But it is getting harder and harder to claim that RomneyCare – and ObamaCare, which is just RomneyCare 2.0 – are going to reduce costs.